Thursday 11 September 2014

THE IMPACT OF INTEREST RATE ON INVESTMENT DECISION IN NIGERIA. AN ECONOMETRIC ANALYSIS TWO



 
1.2     Statement of the Problem
The financial systems of most developing countries (like Nigeria) have came under stress as a result of the economic shocks of the 1980s. The financial repression,  largely  manifested  through  indiscriminate  distortions  of  financial prices including interest rates, has tended to reduce the real rate of growth and

the real size of financial system, more importantly,
financial repression has (retarded) delay development process as envisage by Shaw (1973). This led to insufficient availability of  investible funds, which is regarded  as a  necessary starting point for all investment in an economy. This declines in investment as a result of decline in the external resource transfer since 1982, has been especially sharp  in  the  highly  indepted  countries,  and  has  been  accompanied  by  a slowdown in growth in all LDCs. Both public and private investment rate have fallen, although the latter more drastically than the former. If this trend is maintained, it will lead to a slowdown in medium term growth possibilities in these economies and will reduce the level of long-term per capital consumption and  income,  endangering  the  sustainability  of  the  adjustment  effort.  The observed reduction in investment in LDCS seems to be the result of several factors. First, the lower availability of foreign savings has not been matched by a corresponding  increase  in  domestic  savings.  Secondly,  the  determinating  of fiscal conditions due to the cut of foreign lending, to the rise in domestic interest rate, and the acceleration in inflation forced a contraction in public investment. Thirdly,  the  increase  in  macroeconomic  instability  associated  with  external shocks and the difficulties of domestic government to stabilize the economic has hampered private investment.



Finally, the debt overhand has discourage investment, through its implied credit constraints in international capital markets Luis Serven and Falokun (1989).

In order to curb the adverse effect of the 1980s financial repression, Nigeria government deregulated interest rate in 1987 as part of the Structural Adjustment Programme (SAP) policy package. The official position was that interest rate liberalization among other things, enhance the provision of sufficient funds for investors, especially manufacturers (a priority sector) who were considered to be prime agents, and by implication promoters, of economic growth. However, in a policy reversal, the government in January 1994 out-rightly introduced some measure of regulation into interest rate management. It was claimed that there were   wide   variations   and   unnecessary   high   rate   under   the   complete deregulation of interest rates.


Immediately, deposit rates were once again set at 12% to 15% per annum while a ceiling of 21% per annum was fixed for lending a rate. The cap on interest rate introduced in 1994 was retained in 1993 with a minor modification to allow for flexibility. The cap stayed in place until it was lifted in 1997, thus enabling the pursuit of the flexible interest rate regime in which bank deposit and lending rate were largely detrrmined by the forces of demand and supply for funds (Omole and Falokun 1999).


Declining investment ratio and level are problems; first of all, because investment matters for growth.
Secondly,  because  low  investment  increases  vulnerably  in  the  economy

(Niambon and Oshikoya, 2001; 16). The main challenge that Nigeria is facing is

to make policies that will help revive and raise investment in the country in order to stimulate and sustain economic growth.


In view of the perceived challenge, this research work intends to provide answers to the under listed questions:
1.  What is the impact of interest rate volatility on investment decisions in

Nigeria?

2.  What other variable determine investment decision in Nigeria.

3.  What has been the trend profile of investment in liberalization. He used co-integration and Error Correction Model (ECM) procedure to established both short-term and term effect simultaneously. He found that public investment.



1.3     Objective of the Study

The  research  question  above  have  given  us  an  incite  of  the  objectives  the research work attempts to achieve. They are:
1.  To determine the impact of interest rate volatility on investment decision in

Nigeria.

2.  To empirically investigate, ascertain and unravel other determinants of investment decision in Nigeria.
3.  To investigate the trend profile of investment in Nigeria.

1.4     Statement of Hypotheses

Based on the above stated research objectives, conclusions would be drawn from the following research hypotheses:
1.  Interest rate has no significant impact on investment.

2.  Investment has no other determinants.

3.  Investment has no trend profile in Nigeria.




1.5     Significance of the Study

This work is mainly for academic purpose. However, it will be of great importance to my researcher who would want to embark on any research on interest rate and investment decision.
Also this piece of research work would go a very long way in assisting any person or growth of persons who would wish to know the place of interest rate and investment decision in Nigeria.


Though for academic purpose, this work would be of great important of anybody who would want to embark on investment.



1.6      Scope of Limitation of the Study

The  study focuses  on  the  impact  of  interest  rate  on  investment  decision  in Nigeria  starting  from  1981-2010  using  annual  time  series  data.  Upon  the assertion that every pros have some cons, this study cannot be exception. Some hitches and setback were encountered in the process. First among the list is data

unavailability. For this reason, investment variable would be provided by Gross

Fixed Capital Formation (AFCF).




Secondly, time and financial construct cannot be left out in the list setback and hitches.
The cost of sourcing materials from the internet is exorbitant because of epileptic and erratic power supply of the Power Holding Company of Nigeria (PHCN). Thus, the cyber café power their systems with power generating sets which increases their cost of production which they eventually pass to us (the consumers of their services).


Despite all these hitches and setbacks mentioned above, this research work would have been a perfect work.
TO ORDER FOR THE COMPLETE MATERIAL, CALL 07034538881 OR EMAIL: obejieric@gmail.com

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